Monthly Economic Report (May 2005)

Assessment of the current state of the Japanese economy

  The economy is recovering at a moderate pace, while some weak movements continue to be seen.
  As for short-term prospects, the economic recovery is expected to remain solid with steady recovery in the world economy, as the corporate sector continues to be resilient. On the other hand, attention should be given to the inventory adjustment in the IT related area and to the developments of crude oil prices and other factors.

Policy stance

  Acceleration and expansion of structural reforms will be pursued through early implementation of "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2004."

  The Government, with the Bank of Japan, will further strengthen its policy efforts to ensure a breakaway from deflation in the concentrated consolidation period.

Detailed explanations

1.Demand trends such as consumption and investment

  While the net exports of goods and services contributed to a reduction in real GDP growth during the January-March 2005 quarter, positive factors including increased final private consumption, increased private inventories and increased private company facilities contributed to a 1.3% increase over the previous quarter (5.3% annualized), marking the second consecutive quarter recording positive growth. Nominal GDP was up 0.6% (second consecutive quarter with positive growth) from the previous quarter. As a result, real GDP rose 1.9% in fiscal 2004 (third consecutive year of positive growth), while nominal GDP also increased by 0.7% (second consecutive year of positive growth).

Private consumption is showing movements of a pick up.
  Private consumption is showing movements of a pick up. Behind this there are the facts that income shows further steadiness and that consumer confidence has continued to improve. The Synthetic Consumption Index, which synthesizes demand-side statistics (Family Income and Expenditure Survey, etc.) and supply-side statistics (Indices of Industrial Producer's Shipment, etc.) increased in March.

  As for short-term prospects, private consumption is expected to increase if improvement of the employment situation leads to improvement of the income environment.

Business investment is increasing moderately.
  Business investment is increasing moderately due to an improvement in corporate profits. The Synthetic Business Investment Index fell slightly in March, but has been moderately picking up.

  According to the Bank of Japan short-term business sentiment survey (tankan), business investment in fiscal 2005 is planned to increase for three consecutive years. Business investment is expected to remain on an increasing trend, as corporate profits have been continuing to improve.

Housing constructionhas been almost flat.
  Housing construction has been almost flat. This is because construction of houses for rent and construction of houses for sale moved steadily, although construction of owned houses has been decreasing slightly of late. Housing starts are expected to move steadily if the income environments in households recover along with the improvement in the employment situation.

Public investment has been generally sluggish.
  Public investment has been generally sluggish. However, there has been a temporary increase in orders related to the expansion of Haneda Airport.

Exports and Imports have both been flat. The surplus in the trade and services balance has been flat.
  Exports have become flat. By region, exports to Asia as a whole have been weakening, as exports of general machinery are weakening although electrical equipment have remaind flat. Exports to the US are moderately increasing, with exports of electrical equipment being flat and transportation equipment increasing. Exports to the EU have been weakening. For short-term prospects, exports are expected to moderately increase with the steady recovery in the world economy.
  Imports have remained flat as a whole as machinery equipment, etc. increased while food, fiber products, etc. decreased. By region, imports from Asia, have moderately increased mainly for machinery equipment. Imports from the US have been flat, with imports of machinery equipment increasing and imports of chemical products decreasing. Imports from the EU have moderately decreased mainly for machinery equipment.
  As for the international balance of payments, export volume and import volume have both been flat. Meanwhile, the surplus in the goods and services account has become flat, as the deficit in the services account has been almost flat.

2. Corporate activities and employment

Production is leveling off.
  Industrial production is leveling off as information-related producer goods have picked up while fabricated metals, etc have declined. Inventory levels remain low as a whole. Inventory adjustments for information-related producer goods progressed, while there were increases in some areas such as transportation equipment and chemicals.

  As for short-term prospects, industrial production is expected to pick up with progress of inventory adjustment of information-related producer goods, reflecting the steady recovery of the world economy.

Corporate profits are improving. Firms' judgment on current business conditions shows signs of caution. The number of bankrupt companiesis decreasing.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, a year-to-year increase of 17.6% was posted for corporate profits in the October-December quarter of 2004, which has been continuing for 10 consecutive quarters, although the growth rate has slowed compared to the previous quarter, reflecting production adjustment movement of IT-related goods. According to the BOJ tankan, both manufactures and non-manufacturers expect an increase in profit for the fourth consecutive year in fiscal 2005.

  The BOJ tankan also shows signs of caution in business conditions. Increases in material prices and production adjustments in IT-related goods led to a fall in business conditions for the second consecutive quarter.

  The number of bankrupt companies is decreasing. The number of bankruptcies fell below 1,200, marking the lowest level for March since 1992.

The employment situation is improving, though some severe aspects remain.
  Although the total unemployment rate is at a high level, it is on a downward trend.
  The number of new job offers has been on a moderate increasing trend. The effective ratio of job offers to applicants has been flat. The number of employees has been improving. Overtime hours worked in the manufacturing industry have been flat.
  As for movement on wages, contractual cash earnings has remained flat.

3. Prices and the financial market

Domestic corporate goods prices have been rising recently due to increased material prices.Consumer prices have been flat.
  Domestic corporate goods prices have been rising recently.
  Consumer prices have been flat on month to month. However, consumer prices continued to show a slightly declining trend year-on-year.
  Taken together, these movements show that Japanese economy is in a mild deflationary phase.

Stock prices have been steady around 11,000 yen (Nikkei Average).The yen against the U.S. dollar has been at the 107-yen level after moving in the direction of appreciation from the 108-yen level to the 104-yen level.